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U.S. to put SAC hedge fund out of business over insider trading

Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, responds to a question during an interview in Las Vegas in this file photo taken May 11, 2011. REUTERS/Steve Marcus/Files

By Emily Flitter, Katya Wachtel and Matthew Goldstein

NEW YORK (Reuters) - Steven A. Cohen faces an abrupt end to his career as one of the world's most successful traders after his SAC Capital Advisors became the largest Wall Street firm in years to agree to plead guilty to criminal charges of insider trading, and pay $1.2 billion in fines.

But Cohen, a multi-billionaire and renowned modern art collector, has not been personally charged with any crime and will likely continue managing some $9 billion of his own money through a lightly regulated family office once the hedge fund's plea deal is approved by the courts.

The winding down of the hedge fund's advisory business, which began returning billions of dollars to investors earlier this year as a criminal investigation heated up, requires SAC to install an independent compliance monitor if it continues to trade in the near term, something that will be a big change for Cohen who is known to be a micro-manager.

SAC's guilty plea and fine, announced by prosecutors on Monday, is in addition to a $616 million settlement with the U.S. Securities and Exchange Commission.

Manhattan U.S. Attorney Preet Bharara said at a press conference that the plea deal sends a message to Wall Street that no institution "is too big to jail." He rejected criticism that the plea is something of a disappointment because Cohen himself was not charged with any criminal wrongdoing.

"What happened today is a very substantial and important thing," said Bharara. "It is a rare thing for an entity to be held to account."

Cohen's fund, which once employed more than 900 people with offices on three continents, will no longer manage money for outside investors including pensions, endowments and wealthy individuals, according to the settlement.

In a statement Monday afternoon, SAC said the firm was taking "responsibility for the handful of men who pleaded guilty" to insider trading while working at the hedge fund, but that SAC had "never encouraged, promoted or tolerated insider trading."

Two sources familiar with the situation said that SAC's lack of contrition in its initial public statement contrasted so much with its admission of guilt that prosecutors demanded a change.

A statement issued later Monday said the people who had committed insider trading violations "do not represent the 3,000 honest men and women who have worked at the firm during the past 21 years."

It finished with a new note of regret: "Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred."

April Brooks, special agent in charge of the Federal Bureau of Investigation's New York field office, said the case is a warning to those on Wall Street who aspire to the creed that unfettered "greed is good," as famously espoused by the character Gordon Gekko in the movie "Wall Street."

The guilty plea, which needs to be approved by two judges, coincides with SAC Capital posting solid performance and far outperforming other hedge funds despite the taint of scandal. The fund is up 1.3 percent in October and up 15.95 percent so far this year, a source familiar with its performance said, compared to an almost 6 percent gain for the average fund.

DECISION TIME FOR BANKS ON SAC

Legal observers said it could be days or even weeks before the settlement is approved, giving SAC Capital and prosecutors more time to choose a compliance monitor. It also may give more time to the big Wall Street banks likes Goldman Sachs Group Inc and JPMorgan Chase that lend money to SAC Capital and earn hundreds of millions of dollars a year in trading commissions to decide if they will continue doing business with Cohen firm once it reconstitutes as a family office.

Representatives for Goldman and JPMorgan did not immediately comment on their plans with regards to SAC Capital. But industry sources said the banks are likely to continue to do business with SAC as long as regulators permit.

Indeed, the settlement is only the beginning of a long process for Cohen of freeing himself from the constraints of a federal investigation that has gone on for at least seven years and has tarnished his reputation.

In charging SAC Capital in July with securities fraud and wire fraud, prosecutors accused the 21-year-old Stamford, Conn.-based firm of presiding over a culture in which employees regularly flouted the law and were encouraged to tap personal networks for inside information about publicly traded companies.

"The government is getting an enormous amount of money and shutting down his advisory business. They've basically achieved what they wanted, which is to cut off this guy's ability to manage other people's money," said C. Evan Stewart, a partner at Zuckerman Spaeder who is not connected with the case.

The agreement does not preclude future criminal charges against individuals in the investigation, according to a letter filed in U.S. District Court by prosecutors. Investigations are continuing into trading in at least two other stocks, Weight Watchers International and The Gymboree Corporation, according to a person familiar with the matter.

The person said the investigation could lead to other charges against people who are still employed at SAC. The source, who did not want to be identified, said authorities are still investigating whether Cohen personally can be tied to any allegation of insider trading at the firm.

Cohen is still facing an administrative action brought in July by the SEC accusing him of failing to properly supervise his employees. The indictment against SAC named seven one-time employees of the firm who have either been charged or convicted of insider trading.

LONG-RUNNING INVESTIGATION

The deal also does not include a specific cooperation agreement between the government and SAC, which means it is not clear whether the firm will have to provide more information to the government for the ongoing investigations.

The deal will punctuate one of the longest-running, highest-profile insider trading investigations in recent years, although it will not necessarily end the effort.

The guilty plea from SAC Capital is the biggest achievement yet for U.S. prosecutors in its multi-year crackdown on insider trading in the $2.2 trillion hedge fund industry that has already led to the convictions of former Galleon Group founder Raj Rajaratnam and former Goldman Sachs Group Inc director Rajat Gupta, also a onetime head of McKinsey & Co consultancy.

The hedge fund founded by Cohen in 1992 with $25 million charged some of the highest fees in the industry and was one the more successful, returning an average of 25 percent a year for investors.

U.S. prosecutors charged the hedge fund - which managed as much as $14 billion this year before investors began withdrawing money - on one count of wire fraud and four counts of securities fraud. As part of Monday's deal, SAC has agreed to plead guilty to all five counts.

The total settlement amount of $1.8 billion is made up of $900 million in fines and forfeiture of $900 million. The total forfeiture amount includes a $616 million sum that SAC had already agreed to pay earlier this year to settle civil lawsuits by the SEC.

Meanwhile, observers are expecting an exodus of top employees from SAC, which still maintains a large headquarters in Stamford, Conn. and this year has shuttered offices in London and Chicago.

Several employees leaving SAC Capital's offices in midtown Manhattan declined to comment. Wall Street recruiters have said in recent weeks that traders and analysts at the hedge fund have begun taking preliminary steps towards looking for new jobs.

Cohen will have to "dramatically" downsize his operation, said Stephen Martiros, an independent consultant to family office and private investors.

"Most everything about the way they've been running the firm will have to change," he said, adding SAC could shed marketing specialists, client relationship managers and some legal and compliance staff.

A person who worked with SAC for many years said since the bulk of the firm bonuses will be paid out in the next few weeks, many employees poised to join other hedge funds or start their own funds will likely make their moves.